In a statement, the Bank of England’s said that its role is to help UK businesses and households manage through an economic shock that could prove sharp and large, but should be temporary. The Bank’s three policy committees are today announcing a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19. These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.
Following the spread of Covid-19, risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UK growth. Indicators of financial market uncertainty have reached extreme levels.
Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses. This economic shock will affect both demand and supply in the economy.
Commenting on the announcement Stephen Jones, CEO UK Finance, said “The banking and finance industry recognises the concerns consumers and businesses may have about Covid-19 and all providers are ready and able to offer support to their customers who are impacted directly or indirectly.”
“The new Term Funding Scheme with additional incentives for SMEs (TFS), and the release of the countercyclical buffer as it stands and reversal of the further increase that was in train, will help to ensure that funding from banks to businesses is not constrained and that excess reserves can be used to support lending to the real economy.”
“Lowering the Bank rate remains a challenge for the banking sector and, as acknowledged by the Bank of England, when rates are low it is likely to be difficult for some firms to cut deposit rates which could limit their ability to reduce lending rates. The launch of the TFS will enable the industry to support cashflow needs with competitively priced finance for this vital part of the UK economy.”
“A rate cut will affect consumers and businesses in different ways depending on the nature of the lending and savings products they hold. The majority of mortgage borrowers will not be impacted by today’s rate cut, as they are on fixed-rate mortgages. For those mortgage borrowers on variable rates, lenders will be in contact to discuss any changes to their mortgage while many SMEs will automatically benefit where their borrowing is linked to Bank rate.”
Federation of Small Business (FSB) National Chairman Mike Cherry said “The Bank of England has thankfully wasted no time in taking action to try and stabilise the UK economy in the wake of the Coronavirus outbreak.”
“Four in ten small firms say new credit is unaffordable, so it’s encouraging to see measures – including a rate cut – aimed at making loans less expensive at such a challenging time.”
“Equally the £100 billion cash injection into banks earmarked for small business lending will hopefully throw a lifeline to firms suffering from cashflow issues.”
“More than a third of small firms that secure new finance use it to manage cashflow, so it’s absolutely critical that this new funding makes its way to small firms in need as swiftly as possible. We can’t have hold-ups at the banks.”
“Small firms need all the help they can get at this difficult and uncertain time and they will be hoping that the prompt use of monetary policy levers eases cashflow concerns, particularly for businesses heavily dependent on high footfall.
“Later today, we need the Chancellor to take equally decisive action by introducing measures to stem the disruption being caused by Coronavirus and show that he is on the side of the UK’s everyday entrepreneurs.”
Robert Alster, Head of Investment Services at Close Brothers Asset Management said: “The emergency rate cut is the beginning of an exercise in forbearance ahead of what is set to be a tricky few months for the global economy. Covid-19 is threatening both supply and demand; if people stop going to work and schools close, both output and spending will fall and businesses will struggle to meet their costs. A combined effort from monetary and fiscal levers will be key in seeing the economy through to the other side.”
“The rate cut puts the UK in line with others on the world stage, but in reality the SME funding measures and new support for bank lending are likely to have more of a direct impact on consumers and companies. With the Bank of England having played its hand, attention has shifted to Rishi Sunak’s Budget. Expectations for spending have increased; £600bn investment into infrastructure projects over the next five years will spur further regeneration of the midlands and the North, generating jobs and stimulating spending in local communities. Measures which support the NHS have shot to the top of the agenda. Johnson’s Government will need to get the balance right between short-term measures which meet the challenges posed by Covid-19, and long term policies which will have tangible results by the next election.”
Alex Maddox, Capital Markets & Digital Director, Kensington Mortgages said “The market was predicting a 0.5% rate cut with a 60% probability so this is not a surprise. It is likely that this is just one of many actions that government and the Bank of England take to provide support to the economy. The budget later today may also contain some announcements. For customers with tracker mortgages this rate change will be welcome and reduce their monthly payments very quickly. Fixed rates will not drop as quickly though, as lender’s funding costs may still stay high even after this rate cut.”
Tej Parikh, Chief Economist at the Institute of Directors, said “The Bank’s swift action to shore up confidence and support lending will come as a significant relief to business leaders. A rate cut will help to support confidence in the markets, which has taken a severe knock over the past few days. For businesses, the wider package of lending support could be just as crucial in the medium term, to help firms ride out the anticipated difficulties.”
“Directors will now be looking to the Chancellor to match this support with fiscal measures to lower costs and coax business investment in the months ahead.”